Ebay to Acquire PayPal

Today, Ebay announced that it will acquire Paypal for $1.5 billion in stock. The acquisition makes sense as it merges two successful Internet businesses and turns the online auctioneer into an end to end shop for online transaction.

Sizing up the businesses

Ebay is primarily in the auction business. Everyday, millions of people buy and sell products through the service. Ebay does not hold any of the inventory and focuses primarily on providing a marketplace for exchange.

In parallel, Paypal provides a service that allows people to send money electronically by tying credit card numbers to email addresses. 60% of Paypal’s business comes from people who are using Ebay for auction and Ebay tried to compete with Paypal through its own service called Billpoint. The only problem was that Billpoint never received the kind of support Paypal enjoyed.

While other offerings (Yahoo PayDirect, Citibank’s C2It, Western Union’s MoneyZap) tried to go after the same market, Paypal established an early lead and hung on to it.

Furthermore, Paypal has worked hard to work with multiple credit card providers, and has established signification relationships with companies like UPS to create a system that allows for end to end processing of transaction.

Opportunities

At the same time, Ebay has been moving closer to a fixed price model since the acquisition of Half.com and has expanded into providing other services for sellers. Combining the services Ebay and Paypal have been offering will mean providing an end-to-end solution for anybody interested in selling goods online.

This puts Ebay on a collision course with Amazon.com, which is trying to attack the same problem from the large provider end.

What’s Next?

Once the merger has been completed, expect Ebay to integrate Paypal as part of its complete offering and get rid of Billpoint. Once that is done, Ebay will collect fees on listing goods, transacting the business, receiving the money, and delivering the goods. This is a great model as it puts Ebay clearly in the lead in terms of offering a complete solution for online retailers.

Once it’s managed to do so for small retailers (as it does on Half.com and Ebay “Buy it Now” sellers), expect Ebay to start going after larger and larger customers. In the long run, I would not be surprised to see Ebay and Amazon bid on some of the same contracts, with Amazon showcasing its warehousing capabilities as a plus, while Ebay would present its complete platform as the solution of choice (let’s not forget that Ebay now has a complete API already working, which makes it easier to integrate its services into other platforms.

Since both companies offer capabilities for online selling, I would expect them to fight it out on new features, with Amazon eventually suing Ebay over 1-click functionality and, after a settlement is reached, both companies looking at the possibility of a merger.

It looks like such a thing would make sense as both companies have managed to amass large quantities of customers and both are striking out in similar fields. Whereas Amazon focused on becoming a host to large companies like Target and Toys R Us, Ebay has focused on small retailers. Together, they could become the biggest host of online stores on the whole Internet.

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